FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: May 31, 1999
Commission file number: 0-18066
NETWORKS NORTH INC.
(Exact name of registrant as specified in its charter)
New York 11-2805051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Meteor Drive
Etobicoke, Ontario, Canada M9W 1A4
(Address of principal executive offices)
(Zip Code)
(416) 675-6666
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of July 14, 1999: 2,630,670 shares of common stock,
par value $.0467 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
NETWORKS NORTH INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED MAY 31, 1999
Item
Item 1. Financial Statements:
Consolidated Balance Sheets -
as at May 31, 1999 and August 31, 1998
Consolidated Statements of Operations and Retained Earnings -
for the Nine Months Ended May 31, 1999 and 1998
Consolidated Statements of Operations and Retained Earnings -
for the Three Months Ended May 31, 1999 and 1998
Consolidated Statements of Cash Flows -
for the Nine Months Ended May 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED BALANCE SHEETS
AS AT MAY 31, 1999 AND AUGUST 31, 1998
(Expressed in Canadian dollars - unaudited)
<TABLE>
<CAPTION>
================================================================================================
May 31, 1999 August 31, 1998
$ $
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents 1,192,715 1,001,115
Short-term temporary investments 1,215,461 2,042,333
Accounts receivable, trade - net of allowance for doubtful
accounts of $63,000; August - $53,000 3,140,347 2,668,184
Income taxes receivable 46,336 33,174
Inventory 263,422 308,088
Prepaid expenses 683,592 544,255
- ------------------------------------------------------------------------------------------------
Total current assets 6,541,873 6,597,149
- ------------------------------------------------------------------------------------------------
Investment in Viewer Services 149,779 --
Property and equipment, net 5,374,650 5,785,616
Licenses, net of accumulated amortization 275,683 290,945
Goodwill, net of accumulated amortization 3,064,834 3,214,197
Notes receivable 160,000 160,000
- ------------------------------------------------------------------------------------------------
15,566,819 16,047,907
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 145,331 145,339
Accounts payable - trade 1,387,944 1,440,223
Accrued liabilities 163,200 625,003
Current portion of long-term debt 348,803 348,803
- ------------------------------------------------------------------------------------------------
Total current liabilities 2,045,278 2,559,368
- ------------------------------------------------------------------------------------------------
Long-term debt 2,747,561 2,744,991
Less: current portion (348,803) (348,803)
- ------------------------------------------------------------------------------------------------
2,398,758 2,396,188
- ------------------------------------------------------------------------------------------------
Deferred income taxes payable 59,173 59,173
- ------------------------------------------------------------------------------------------------
Total liabilities 4,503,209 5,014,729
- ------------------------------------------------------------------------------------------------
Shareholders' equity
Share capital
900,000 preferred shares 10,917 10,917
2,630,670 common shares (August - 2,625,170) 162,824 162,484
Capital in excess of par value 8,837,608 8,837,948
Retained earnings 2,052,261 2,021,829
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 11,063,610 11,033,178
- ------------------------------------------------------------------------------------------------
15,566,819 16,047,907
================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND MAY 31, 1998
(Expressed in Canadian Dollars - Unaudited)
<TABLE>
<CAPTION>
======================================================================================
May 31, 1999 May 31, 1998
$ $
- --------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue 10,588,401 11,143,311
Cost of sales 3,823,348 4,317,277
- --------------------------------------------------------------------------------------
6,765,053 6,826,034
- --------------------------------------------------------------------------------------
Selling, general and administrative expenses 5,370,804 4,926,361
Interest and bank charges 155,038 91,644
Depreciation and amortization 1,023,578 884,345
- --------------------------------------------------------------------------------------
Income before income taxes and minority interest 215,633 923,684
Provision for income taxes 254,000 296,058
Minority interest (68,799) 133,828
- --------------------------------------------------------------------------------------
Net income and comprehensive income for the period 30,432 493,798
Retained earnings, beginning of period 2,021,829 1,403,764
- --------------------------------------------------------------------------------------
Retained earnings, end of period 2,052,261 1,897,562
======================================================================================
Earnings per share (Note 4):
Basic 0.01 0.19
Diluted 0.01 0.17
======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MAY 31, 1999 AND MAY 31, 1998
(Expressed in Canadian Dollars - Unaudited)
<TABLE>
<CAPTION>
==================================================================================================
May 31, 1999 May 31, 1998
$ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue 3,425,197 3,651,725
Cost of sales 1,360,757 1,441,730
- --------------------------------------------------------------------------------------------------
2,064,440 2,209,995
- --------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 1,940,307 1,634,110
Interest and bank charges 65,830 42,055
Depreciation and amortization 338,608 297,535
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (280,305) 236,295
Provision (recovery) for income taxes (27,000) 57,543
Minority interest (50,561) 33,945
- --------------------------------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) for the period (202,744) 144,807
Retained earnings, beginning of period 2,255,005 1,752,755
- --------------------------------------------------------------------------------------------------
Retained earnings, end of period 2,052,261 1,897,562
==================================================================================================
Earnings (loss) per share:
Basic (0.08) 0.05
Diluted (0.08) 0.05
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND MAY 31, 1998
(Expressed in Canadian dollars - unaudited)
<TABLE>
<CAPTION>
=====================================================================================================
May 31, 1999 May 31,1998
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income and comprehensive income for the period 30,432 493,798
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,023,578 884,345
Loss from investment in Viewer Services 67,787 4,955
Accretion of interest on non-interest bearing promissory notes 26,392 29,949
Changes in assets and liabilities:
Decrease (increase) in short-term investments 826,872 (191,598)
Increase in accounts receivable (472,163) (1,199,770)
Increase in income taxes receivable (13,162) --
Decrease in inventory 44,666 280,437
Increase in prepaid expenses (139,337) (300,549)
Increase (decrease) in accounts payable and
accrued liabilities (608,261) 218,902
Decrease in deferred revenue -- (275,925)
Decrease in income taxes payable -- (390,516)
- -----------------------------------------------------------------------------------------------------
Cash provided by (used by) operating activities 786,804 (445,972)
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (447,987) (1,268,265)
Investment in Viewer Services (149,779) 16,135
Increase in notes receivable -- (3,180)
Acquisition of Interlynx Multimedia -- (380,001)
- -----------------------------------------------------------------------------------------------------
Cash used in investing activities (597,766) (1,635,311)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank indebtedness (8) (464,930)
Proceeds from issuing common shares -- 348,965
Notes and loans payable 2,570 657,461
- -----------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,562 541,496
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents during the period 191,600 (1,539,787)
Cash and cash equivalents, beginning of period 1,001,115 2,421,797
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,192,715 882,010
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
NETWORKS NORTH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1999
Note 1. Basis of Presentation
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in the Annual Report on
Form 10-K of Networks North Inc. (the "Company") (Commission No.:0-18066), filed
with the Securities and Exchange Commission on November 27, 1998. The results of
operations for the nine months ended May 31, 1999 are not necessarily indicative
of the results for the full fiscal year ending August 31, 1999.
Note 2. General
The financial statements of the Company for the three and nine months ended May
31, 1999 (the "1999 Third Fiscal Quarter" and "1999 First Three Quarters"
respectively), and May 31, 1998 (the "1998 Third Fiscal Quarter" and "1998 First
Three Quarters" respectively), include the operations of the Company's
wholly-owned subsidiaries NTN Interactive Network Inc. ("NTNIN") and 3484751
Canada Inc., NTNIN's wholly-owned subsidiary Magic Lantern Communications Ltd.
("Magic") and 51% of the operations of Interlynx Multimedia Inc. ("Interlynx").
Effective June 1, 1999 subsequent to the end of the quarter, the Company
purchased the remaining 49% of Interlynx.
Magic conducts its operations directly and through its wholly-owned
subsidiaries, 745695 Ontario Ltd. ("Custom Video") and B.C. Learning Connection
Inc. ("BCLC"), its 75% ownership of the outstanding shares of Sonoptic
Technologies Inc. ("Sonoptic"), and its 50% ownership of the outstanding shares
of 1113659 Ontario Ltd. ("Viewer Services"), a joint venture operated with
International Tele-Film Enterprises Ltd. (Magic, Custom Video, BCLC, Sonoptic
and Viewer Services are referred to as the "Magic Lantern Group").
Interlynx conducts its operations directly and through its 60% ownership of the
outstanding shares of Universal Content Inc. (formerly known as Interlynx
International Inc.), which is the marketing and sales arm of Interlynx
responsible for the international brokering of CD-ROM products from developers
around the world.
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
<PAGE>
Note 3. Business Segment Data for the nine months ended May 31, 1999 and
May 31, 1998
Interactive TV Educational and
Entertainment Multimedia Distribution Total
------------- ----------------------- -----
$ $ $
1999
Total revenues 6,067,839 4,520,562 10,558,401
Operating income 274,865 (59,232) 215,633
Net earnings 20,865 9,567 30,432
Total assets 9,204,928 6,361,891 15,566,819
Current liabilities 1,081,314 963,964 2,045,278
Total liabilities 2,726,621 1,776,588 4,503,209
1998
Total revenues 6,135,971 5,007,340 11,143,311
Operating income 596,627 327,057 923,684
Net earnings 300,569 193,229 493,798
Total assets 12,241,593 3,415,346 15,656,939
Current liabilities 1,153,928 1,397,118 2,551,046
Total liabilities 2,851,904 2,208,624 5,060,528
Note 4. Earnings per share
Earnings per share were calculated in accordance with Statement of Financial
Accounting Standards No. 128. The following table sets forth the computation of
basic and diluted earnings per share for the nine months ended May 31:
1999 1998
---------- ----------
Numerator:
Net income (numerator for basic
earnings per share) $ 30,432 $ 493,798
Accretion of interest on non-interest
bearing promissory notes -- 29,949
---------- ----------
Numerator for diluted earnings
per share $ 30,342 $ 523,747
========== ==========
Denominator:
For basic - weighted
average number of shares 2,630,670 2,541,311
Effect of dilutive securities:
Convertible preferred shares 192,857 197,619
Convertible promissory notes 98,193 185,448
Employee stock options 54,396 23,894
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average number of shares
and assumed conversions 2,976,116 2,948,272
========== ==========
Basic earnings per share $ 0.01 $ 0.19
========== ==========
Diluted earnings per share $ 0.01 $ 0.18
========== ==========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The financial statements of the Company and the information contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are expressed in Canadian dollars.
General
The Company, through its wholly-owned subsidiary, NTNIN, currently provides its
products and services through eight business units or subsidiaries. Of these,
two are considered to be the traditional core of the Company's business, that
is, directly related to multi-player interactive entertainment programs. The two
traditional core business units are the Hospitality Group ("Hospitality") and
the Corporate Products Group ("Corporate"). Five units, comprising the "Magic
Lantern Group", are (i) NTNIN's wholly-owned subsidiary Magic, which markets and
distributes an exclusively licensed library of educational video titles to
schools, school boards and Ministries of Education across Canada, (ii) Magic's
wholly-owned subsidiary Custom Video, which provides video dubbing and
conversion services, (iii) Custom Video's wholly-owned subsidiary BCLC, which
has traditionally operated under an exclusive arrangement with the British
Columbia Ministry of Education to provide marketing and fulfilment services for
educational video titles in the British Columbia school system, (iv) Magic's 75%
owned subsidiary Sonoptic, which operates a digital video facility that converts
analog video to digital video formats, and (v) Magic's 50% owned joint venture
Viewer Services, which was created to assume the inbound telemarketing and
product fulfilment services required by Canadian television broadcasters. The
eighth unit is Interlynx, which designs and develops web-based training
programs, educational and corporate multimedia, CD-ROMs and web sites.
Highlights of the Three Months Ended May 31, 1999
During the 1999 Third Fiscal Quarter, it was announced that Interlynx has signed
an agreement with Centre International de Formation a l'Audiovisual et de
Production and SRC Localization to provide both web based training software and
multimedia production services to major companies in France and French speaking
countries. Interlynx also commenced work on a contract with the Canadian
Imperial Bank of Commerce (CIBC) to provide custom web-based software to
facilitate all aspects of eSourcing for CIBC.
Results of Operations for the Three Months ended May 31, 1999
The Company's total revenues for the 1999 Third Fiscal Quarter were $3,425,197,
compared to $3,651,725 for the 1998 Third Fiscal Quarter, a decrease of $226,528
or 6.2%. Major factors impacting the revenue decrease include a $78,823 decrease
in maintenance revenues as the result of a non-recurring maintenance contract
obtained in the 1998 Third Fiscal Quarter. Advertising sponsorship has decreased
$81,644 as the result of several 1998 sponsors not
<PAGE>
renewing in the 1999 Third Fiscal Quarter. CD-ROM sales have decreased as the
result of a weakened worldwide market.
Total cost of sales for the 1999 Third Fiscal Quarter was $1,360,767, compared
to $1,441,730 for the 1998 Third Fiscal Quarter, a decrease of $80,963 or 5.6%.
This decrease is commensurate with the decreased sales levels experienced above.
As a percentage of revenues, cost of sales in the 1999 Third Fiscal Quarter is
consistent with the 1998 Third Fiscal Quarter.
Total selling, general and administrative expenses for the 1999 Third Fiscal
Quarter were $1,940,307, compared to $1,634,110 for the 1998 Third Fiscal
Quarter, an increase of $306,165 or 18.7%. As a percentage of the Company's
total revenues, such expenses increased to 56.6% for the 1999 Third Fiscal
Quarter from 44.7% for the 1998 Third Fiscal Quarter. This increase was caused
in part by increased staffing and salaries. In addition, the Interlynx selling,
general and administrative expenses increased $137,733 in the 1999 Third Fiscal
Quarter versus the 1998 Third Fiscal Quarter reflecting increased development
and marketing costs associated with the web-based training software, PROFIS.
Interest and bank charges for the 1999 Third Fiscal Quarter were $65,830,
compared to $42,055 for the 1998 Third Fiscal Quarter, an increase of $23,775 or
56.5%. This increase was the result of financing the purchase of land and
building at 10 Meteor Drive with bank debt. As a percentage of the Company's
total revenues, interest and bank charges increased to 1.3% for the 1999 Second
Fiscal Quarter from 0.7% for the 1998 Second Fiscal Quarter.
Total depreciation and amortization expenses for the 1999 Second Fiscal Quarter
were $338,788, compared to $312,408 for the 1998 Second Fiscal Quarter, an
increase of $26,380 or 8.4%. This increase was the result of additional
depreciation on fixed assets added in 1999 and depreciation on the newly
acquired building located at 10 Meteor Drive.
A recovery of income taxes of $27,000 was recorded in the 1999 Third Fiscal
Quarter compared with a provision for income taxes of $57,543 for the 1998 Third
Fiscal Quarter, a change of $84,543. As the tax provision for the Company is
based solely on the taxable income of NTNIN, it is unaffected by losses
experienced in other divisions. For this reason, the tax recovery is reflective
of the loss incurred by NTNIN in the 1999 Third Fiscal Quarter but is not
increased by the losses incurred by the other companies.
The minority interest share in losses for the 1999 Third Fiscal Quarter was
$50,561. This is compared to the minority interest share in profits for the 1998
Third Fiscal Quarter of $33,945, an overall change of $84,056. The minority
interest share of losses results from the losses incurred by Interlynx in the
1999 Third Fiscal Quarter. In the 1998 Third Fiscal Quarter, Interlynx recorded
net income and hence there was minority interest share in profits for the same
period.
As a result of all the above, the net loss and comprehensive loss for the 1999
Third Fiscal Quarter was $202,744, compared to net income and comprehensive
income of $144,807 for the 1998 Third Fiscal Quarter, a decrease of $347,528. In
summary, the 1999 Third Fiscal Quarter loss resulted primarily from the loss
experienced by Interlynx as well as decreases in advertising sponsorship and
maintenance revenue in NTNIN.
<PAGE>
Results of Operations for the Nine Months Ended May 31, 1999
The Company's total revenues for the 1999 First Three Quarters were $10,588,401,
compared to $11,143,311 for the 1998 First Three Quarters, a decrease of
$554,910 or 5.0%. This decrease was caused in part by a weakened worldwide
market for CD-ROMs, which resulted in a 54.0% decrease in revenues for Interlynx
over the prior period. Magic's video and software sales decreased by 12.2%.
Total cost of sales for the 1999 First Three Quarters was $2,462,591, compared
to $2,875,547 for the 1998 First Three Quarters, a decrease of $412,956 or
14.4%. This decrease is commensurate with the decreased sales levels experienced
above. As a percentage of the Company's total revenues, such costs of sales
decreased to 35.9% for the 1999 First Three Quarters from 38.7% for the 1998
First Three Quarters.
Total selling, general and administrative expenses for the 1999 First Three
Quarters were $5,370,804, compared to $4,926,361 for the 1998 First Three
Quarters, an increase of $444,421 or 9.0%. This increase was caused in part by
increased staffing and salaries as well as general increases in other
administrative expenses. As a percentage of the Company's total revenues, such
expenses increased to 50.7% for the 1999 First Three Quarters from 44.2% for the
1998 First Three Quarters.
Interest and bank charges for the 1999 First Three Quarters amounted to
$155,038, compared to $91,644 for the 1998 First Three Quarters, an increase of
$63,394 or 69.2%. This increase was the result of financing the purchase of land
and building at 10 Meteor Drive, acquired in April 1998. As a percentage of the
Company's total revenues, interest and bank charges increased to 1.5% for the
1999 First Three Quarters from 0.7% for the 1998 First Three Quarters.
Total depreciation and amortization expenses for the 1999 First Three Quarters
were $1,023,578, compared to $884,345 for the 1998 First Three Quarters, an
increase of $139,233 or 15.7%. This was the result of increased depreciation on
rental and office equipment and furniture and fixtures added during the period.
Depreciation on the newly acquired building located at 10 Meteor Drive also
contributed to the increase. As a percentage of the Company's total revenues,
such expenses increased to 9.7% for the 1999 First Three Quarters from 7.9% for
the 1998 First Three Quarters.
The provision for income taxes for the 1999 First Three Quarters was $281,000,
compared to $296,058 for the 1998 First Three Quarters, a decrease of $42,058 or
14.2%. As the tax provision for the Company is based solely on the taxable
income of NTNIN, it is unaffected by losses experienced in other divisions. For
this reason, the tax provision did not decrease at the same rate that income
before income taxes decreased in 1999 compared to 1998.
The minority interest share in losses for the 1999 First Three Quarters was
$68,799. This is compared to the minority interest share in profits for the 1998
First Three Quarters of $133,828, an overall change of $202,627. The minority
interest share of losses results from the losses incurred by Interlynx in the
1999 First Three Quarters. In the 1998 First Three Quarters, Interlynx recorded
net income and hence there was minority interest share in profits for the same
period.
<PAGE>
For all of the above reason, net income and comprehensive income for the 1999
First Three Quarters was $30,432 compared to $493,798 for the 1998 First Three
Quarters, a decrease of $463,366 or 93.8%. In summary the decrease in net income
for the 1999 First Three Quarters can be attributed primarily to the loss
incurred by Interlynx. In addition a non-recurring foreign exchange gain was
recognized in the 1998 First Three Quarters.
Liquidity and Capital Resources
At May 31, 1999, the Company had working capital of $4,496,594, a decrease of
$111,923 from working capital of $4,037,781 at August 31, 1998.
For the 1999 First Three Quarters, the Company had a net increase in cash flow
of $191,600 compared to a net decrease of $1,539,787 in the 1998 First Three
Quarters.
Cash provided by operating activities for the 1999 First Three Quarters was
$786,804, compared to $445,972 used by operating activities in the 1998 First
Three Quarters. In 1999, the major sources that contributed to cash being
provided by operating activities were as follows; net income with non-cash
expenses added back of $1,148,189, decreases in short-term investments and
inventory of $826,872 and $44,666 respectively. The major uses of operating
funds included increases in accounts receivable and prepaid expenses of $472,163
and $139,337 respectively as well decreases in accounts payable and accrued
liabilities of $608,261. In 1998, the major sources that contributed to cash
being provided by operating activities were net income with non-cash expenses
added back of $1,413,047, a decrease in inventory of $280,437 and an increase in
accounts payable and accrued liabilities of $218,902. These sources were
somewhat offset by increases in short-term investments, accounts receivable and
prepaid expenses of $191,598, $1,199,770 and $300,549 respectively, and
decreases in deferred revenue and income taxes payable of $275,925 and $390,516
respectively.
Cash used in investing activities in the 1999 First Three Quarters was $597,766,
compared to the $1,268,265 used in investing activities in the 1998 First Three
Quarters. In 1999, cash was used in the purchase of property and equipment. Cash
was used in the comparable prior period for the purchase of property and
equipment and the acquisition of Interlynx.
Cash provided by financing activities in the 1999 First Three Quarters was
$2,562, compared to the $541,496 in the 1998 First Three Quarters. In 1999, cash
was provided by short-term borrowings, which were used in day-to day operations
and to meet scheduled debt principal repayments. In 1998, cash was obtained
through the issuance of common shares ($348,965) and financing of the purchase
of the land and building at 10 Meteor Drive. This cash was then used in the
repayment of notes payable and to meet scheduled debt principal repayments,
which totaled $464,930.
Management believes that the Company's working capital position and current
borrowings provide the necessary liquidity, on both a short and long term basis,
for its planned activities. Additional external financing will not be required
for its operating activities during the year ending August 31, 1999 (the "1999
Fiscal Year"). However, any changes in such plans may require the Company to
seek outside financing. No arrangements are presently in place for outside
financing should the need arise.
<PAGE>
Inflation
The rate of inflation has had little impact on the Company's operations or
financial position during the nine months ended May 31, 1999 and 1998 and
inflation is not expected to have a significant impact on the Company's
operations or financial position during the 1999 Fiscal Year.
The Company pays a number of its suppliers, including its licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
its gross profit as well as its net income. If the value of the Canadian dollar
falls against the US dollar, the cost of sales of the Company will increase
thereby reducing its gross profit and net income. Conversely, if the value of
the Canadian dollar rises against the US dollar, its gross profit and net income
will increase.
Year 2000 Compliance
The year 2000 issue arises because many computerized systems use two digits,
rather than four, to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900, or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure, which
could affect the Company's ability to conduct normal business operations.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems. Non-IT systems refers to other miscellaneous systems,
not thought of as IT systems, such as alarm systems and fax machines. In
addition, the Company is in the process of determining the extent to which the
systems of third parties with whom the Company has significant relationships may
be vulnerable to year 2000 issues and what impact, if any, these year 2000
issues will have on the Company. As part of these assessments, a compliance
plan, which includes the formation of a steering committee and a timetable for
identifying, evaluating, resolving and testing its year 2000 issues, has been
developed.
The timetable provides for the Company's completion of its remediation of any
year 2000 issues by the end of September 1999. While it is difficult, at
present, to fully quantify the overall cost of this work, the Company currently
estimates its total spending for year 2000 issues to be up to $500,000. This
estimate is a function of ongoing evaluation as to whether certain systems and
equipment will be corrected or replaced, which is largely dependent on
information to be obtained from suppliers or other external sources. Costs for
systems maintenance and modification are expensed as incurred while spending for
new hardware, software or equipment will be capitalized and depreciated over the
assets'
<PAGE>
useful lives. The Company anticipates funding its year 2000 expenditures out of
its cash flows from operations.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
Exhibit
Number Title
- ------- -----
3.1 Certificate of Incorporation, as amended to date.+
3.2 By-Laws, as amended to date.+
10.1 License Agreement, dated March 23, 1990, between NTN Communications,
Inc. and NTN Interactive Network Inc.+
10.2 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly
and NTN Interactive Network Inc., minus Schedules thereto.+
10.3 Designation Agreement, dated as of October 4, 1994, among NTN Canada,
Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc.
(formerly Labatt Communications Inc.).+
22 List of Subsidiaries.+
27 Financial Data Schedule.
+ Incorporated by reference. See Exhibit Index.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETWORKS NORTH INC.
Dated: July 14, 1999 By: /s/ Peter Rona
------------------------------------------
Peter Rona,
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: July 14, 1999 By: /s/ Don Pagnutti
------------------------------------------
Don Pagnutti,
Principal Financial Officer
<PAGE>
NETWORKS NORTH INC.
FORM 10-Q
May 31, 1999
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
- ------- ---------------------- --------
3.1 Certificate of Incorporation, as amended to date +1, Exh. 3.1
3.2 By-Laws, as amended to date +1, Exh. 3.2
10.1 License Agreement, dated March 23, 1990, between NTN
Communications, Inc. and NTN Interactive Network Inc. +2, Exh. 10.9
10.2 Stock Purchase Agreement, dated October 1, 1996, among
Connolly-Daw Holdings Inc., 1199846 Ontario Ltd., Douglas
Connolly, Wendy Connolly and NTN Interactive Network Inc.,
minus Schedules thereto +3, Exh. 10.1
10.3 Designation Agreement, dated as of October 4, 1994, among
Networks North Inc. (formerly known as NTN Canada, Inc., NTN
Interactive Network Inc. and NetStar Enterprises Inc.
(formerly Labatt Communications Inc.) +4, Exh. C
22 List of Subsidiaries +1, Exh. 22
27 Financial Data Schedule ++
- ----------
+1 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of the
Company, for its fiscal year ended August 31, 1996 (File No. 0-18066),
filed on December 16, 1996.
+2 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990 (File
No. 2-91761-C), filed on April 1, 1991.
+3 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 2, 1996) (File No. 0-18066), filed on
October 17, 1996.
+4 All exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Current Report on Form 8-K of the
Company (Date of Report: October 4, 1994) (File No. 0-18066), filed on
October 18, 1994.
++ Filed electronically pursuant to Item 401 of Regulation S-T.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly report on Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CURRENCY> Canadian dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1.474
<CASH> 1,192,715
<SECURITIES> 1,215,461
<RECEIVABLES> 3,203,347
<ALLOWANCES> 63,000
<INVENTORY> 263,422
<CURRENT-ASSETS> 6,541,873
<PP&E> 5,374,650
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,566,819
<CURRENT-LIABILITIES> 2,045,279
<BONDS> 0
0
10,917
<COMMON> 162,824
<OTHER-SE> 10,889,868
<TOTAL-LIABILITY-AND-EQUITY> 15,566,819
<SALES> 10,588,401
<TOTAL-REVENUES> 10,588,401
<CGS> 3,823,348
<TOTAL-COSTS> 3,823,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,038
<INCOME-PRETAX> 215,633
<INCOME-TAX> 254,000
<INCOME-CONTINUING> 233,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,432
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
